fundeye

HMRC report shows investors have turned to alternative schemes as pension tax relief cuts bite

News Team, 30/05/2019

New data released by HM Revenue and Customs this month about companies raising funds has revealed that there has been a huge spike of investments since the erosion pension tax allowance in 2010. Approximately £20 billion has been moved into companies through Enterprise Investment Schemes (EIS) raising since it launched 26 years ago in 1993, with increasing totals in the past nine years.

According to the fresh figures in the report, titled “Enterprise Investment Scheme , Seed Enterprise Investment Scheme: Statistics and Social Investment Tax Relief  on companies raising funds”, over £1.9 billion was raised through EIS in 2017/18, with investments of up to £1 million potentially boosted by 30 percent tax relief.

Tom Selby, senior analyst at AJ Bell, believes that the tax relief has been the key incentive for the investments, which have most commonly been increasing in the South East.

He said: “The last decade or so has seen a boom in EIS investments, with savers scrabbling to benefit from the 30% tax relief on offer. Companies based in London and the South East have perhaps unsurprisingly been the biggest winners, scooping up two-thirds of the available EIS investment cash in 2017/18. A similar trend has been reported where companies seek funding through the Seed Enterprise Investment Scheme.”

Seed Enterprise Investment Schemes (SEIS)  have helped raise over £1 billion since they were created six years ago  in 2012, involving 12,900 companies. In SEIS, investments up to £100,000 qualify for 50 percent tax relief

He explained: “Clearly the increase in tax relief on EIS investments from 20 percent to 30 percent in 2011/12 will have had a significant impact on demand in recent years. However, there are two other developments that have contributed to the burgeoning EIS and SEIS markets.

At the lower end, the rise of crowdfunding websites such as Seedrs and Crowdcube makes it easier than ever for those with small funds to dip their toes in the world of direct investment. When it comes to SEIS, for example, over half (58 percent) of investors claiming tax relief invested £10,000 or less, with over 1 in 10 investing £500 or less.

At the other end of the spectrum, the dramatic erosion of pension tax relief allowances since 2010 is likely to have encouraged many wealthier investors to seek alternative homes for their hard-earned cash.”

He also noted that the complications within the allowance system have led to investors seeking alternatives, but emphasised the importance of people knowing the rules and potential downsides of such investment decisions.

Mr Selby noted: “In particular the cut in the lifetime allowance from £1.8 million to £1,055,000, the reduction in the annual allowance from £255,000 to £40,000, and the introduction of the hideously complex annual allowance taper will inevitably have pushed many to seek out savings alternatives. In this environment the 30 percent tax relief on offer through EIS and 50% through SEIS are understandably attractive.

Investors considering going down this route need to make sure they understand the rules and the risks they are taking.

The incentives on offer through EIS and SEIS exist because the companies are generally start-ups and therefore have a higher chance of failure. As such, it is possible that you will get back less than you put in initially – even when generous tax benefits are taken into account.”

AJ Bell was established in 1995 and is one of the largest investment platforms in the UK, serving 214,900 customers with assets under administration of £47.7 billion.

About PAM

PAM Insight is the world’s leading independent provider of essential specialist news, analysis and comparative data for the fast-evolving world of wealth management.

Read more about PAM

Subscribers

Dedicated to serve both investors and fund companies, fundeye.com aims at becoming the preferred publication platform for market professionals.

Read more